UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 20 F

Transcription

1 20 F 1 zk htm 20 F UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 20 F REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 Or ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 Or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Or SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report For the transition period from to Commission File number:

2 POINTER TELOCATION LTD. (Exact name of Registrant as specified in its charter) N/A (Translation of Registrant s name into English) ISRAEL (Jurisdiction of incorporation or organization) 14 Hamelacha Street, Rosh Haayin 48091, Israel (Address of principal executive offices)

3 Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class Ordinary Shares, NIS 3.00 nominal value per share Name of each exchange on which registered NASDAQ Stock Market LLC Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer s classes of capital or common stock as of the close of the period covered by the annual report. 4,860,024 Ordinary Shares, NIS 3.00 nominal value per share Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of Yes No Note Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

4 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b 2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non accelerated filer 2

5 Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board Other If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 Item 18 If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act). Yes No 3

6 Table of Contents PART I. 8 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 8 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 8 ITEM 3. KEY INFORMATION 8 A. SELECTED FINANCIAL DATA 8 B. CAPITALIZATION AND INDEBTEDNESS 11 C. REASONS FOR THE OFFER AND USE OF PROCEEDS 11 D. RISK FACTORS 11 ITEM 4. INFORMATION ON THE COMPANY 30 A. HISTORY AND DEVELOPMENT OF THE COMPANY 30 B. BUSINESS OVERVIEW 36 C. ORGANIZATIONAL STRUCTURE 45 D. PROPERTY, PLANTS AND EQUIPMENT 45 ITEM 4A. UNRESOLVED STAFF COMMENTS 46 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 46 A. OPERATING RESULTS 46 B. LIQUIDITY AND CAPITAL RESOURCES 65 C. RESEARCH AND DEVELOPMENT 68 D. TREND INFORMATION 70 E. OFF BALANCE SHEET ARRANGEMENTS 73 F. CONTRACTUAL OBLIGATIONS 74 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 75 A. DIRECTORS AND SENIOR MANAGEMENT 75 B. COMPENSATION 77 C. BOARD PRACTICES 78 D. EMPLOYEES 82 E. SHARE OWNERSHIP 83

7 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 84 A. MAJOR SHAREHOLDERS 84 B. RELATED PARTY TRANSACTIONS 85 4

8 C. INTERESTS OF EXPERTS AND COUNSEL 86 ITEM 8. FINANCIAL INFORMATION 86 A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 86 B. SIGNIFICANT CHANGES 87 ITEM 9. THE OFFER AND LISTING 87 A. OFFER AND LISTING DETAILS 87 B. PLAN OF DISTRIBUTION 89 C. MARKETS 89 D. SELLING SHAREHOLDERS 89 E. DILUTION 89 F. EXPENSES OF THE ISSUE 89 ITEM 10. ADDITIONAL INFORMATION 90 A. SHARE CAPITAL 90 B. MEMORANDUM AND ARTICLES OF ASSOCIATION 90 C. MATERIAL CONTRACTS 98 D. EXCHANGE CONTROLS 100 E. TAXATION AND GOVERNMENT PROGRAMS 100 F. DIVIDENDS AND PAYING AGENTS 104 G. STATEMENT BY EXPERTS 104 H. DOCUMENTS ON DISPLAY 104 I. SUBSIDIARY INFORMATION 105 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 105 ITEM 12. DESCRIPTIONS OF SECURITIES OTHER THAN EQUITY SECURITIES 108 PART II 108 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 108 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 108 ITEM 15T. CONTROLS AND PROCEDURES 109 ITEM 16. [RESERVED] 110 ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT. 110

9 ITEM 16B. CODE OF ETHICS. 110 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

10 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES 111 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 111 ITEM 16F. CHANGE IN THE REGISTRANT'S CERTIFYING ACCOUNTANT 111 ITEM 16G. CORPORATE GOVERNANCE 111 ITEM 16H. MINE SAFETY DISCLOSURE 113 PART III 113 ITEM 17. FINANCIAL STATEMENTS 113 ITEM 18. FINANCIAL STATEMENTS 113 ITEM 19. EXHIBITS 113 6

11 INTRODUCTION As used in this Annual Report on Form 20 F, the terms "we," "us," "our" and the "Company" mean Pointer Telocation Ltd. and its subsidiaries, unless otherwise indicated. The term "Pointer" means Pointer Telocation Ltd. excluding its subsidiaries and affiliates. We conduct our operations through two main segments. Through our Cellocator segment, we design, develop and produce leading mobile resource management products, including asset tracking, fleet management, and security products, for sale to third party operators providing mobile resource management services and to our Pointer segment. Through our Pointer segment, we act as an operator by bundling our products together with a range of services, including stolen vehicle tracking, fleet management, roadside assistance, car sharing and emergency home repair services for sale to insurance companies, fleets, and individual customers. For further information, please see "Item 4 Information on the Company". This Annual Report on Form 20 F, including, without limitation, information appearing under Item 4 Information on the Company and Item 5 Operating and Financial Review and Prospects, contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The use of the words projects, expects, may, plans or intends, or words of similar import, identifies a statement as forward looking. The forwardlooking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward looking statements are based on the assumption that the Company will not lose a significant customer or customers or experience increased fluctuations of demand or rescheduling of purchase orders, that our markets will be maintained in a manner consistent with our historical experience, that our products will remain accepted within their respective markets and will not be replaced by new technology, that competitive conditions within our markets will not change materially or adversely, that we will retain key technical and management personnel, that our forecasts will accurately anticipate market demand, and that there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In addition, our business and operations are subject to substantial risks which increase the uncertainty inherent in the forward looking statements. In light of the significant uncertainties inherent in the forward looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this annual report at Item 3D Risk Factors. Except as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. 7

12 On August 10, 2005, a 100 to 1 reverse stock split of our ordinary shares was effected. As a result of the reverse stock split, each one hundred shares of our ordinary shares with par value NIS 0.03 were converted into one ordinary share NIS All share numbers in this annual report reflect this reverse split. "Cellocator" is a trademark owned by us. References in this annual report to Dollars, U.S. Dollars and $ are to United States Dollars and references to shekels" and NIS are to New Israeli Shekels, the Israeli currency. PART I. ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION A. SELECTED FINANCIAL DATA The selected financial data is incorporated by reference to Item 5A Operating Results Selected Financial Data of this annual report and should be read in conjunction with our consolidated financial statements and the notes thereto, which are set forth in Item 18 Financial Statements and are incorporated by reference, and the other financial information appearing in Item 5 of this annual report. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States (US GAAP). We derived the following selected consolidated financial data for each of the years ended December 31, 2011, 2010 and 2009 from our consolidated financial statements and related notes included in this annual report. The selected consolidated financial data (including balance sheet data) for the years ended December 31, 2008 and 2007 have been derived from audited financial statements not included in this annual report. 8

13 Selected Financial Data Under U.S. GAAP: Year Ended December 31, (in thousands of U.S. Dollars except weighted average number of ordinary shares, and basic and diluted income (loss) per ordinary share) Statement of Income Data: Revenues: Products 31,140 25,415 20,038 30,645 15,821 Services 54,778 48,448 45,287 46,010 35,806 Total Revenues 85,918 73,863 65,325 76,655 51,627 Cost of revenues: Products 18,283 14,175 10,774 16,392 9,414 Services 37,249 31,264 26,645 29,869 23,034 Amortization of intangible assets 1, Total Cost of Revenues 57,030 46,417 38,395 47,241 32,725 Gross profit 28,888 27,446 26,930 29,414 18,902 Operating Expenses: Research and development, net 3,082 2,532 2,817 2,511 1,675 Selling, general and administrative expenses 20,382 16,503 15,037 15,245 11,143 Amortization of intangible assets 1,821 1,774 1,942 2,365 1,841 Impairment of intangible asset 6,216 2, Total operating income (loss) (2,613) 6,637 4,175 9,293 4,207 Financial expenses, net 1,779 1,976 2,070 4,054 2,814 Other income (expenses) (12) Income (loss) before tax on income (4,469) 4,640 2,089 5,261 1,381 Taxes on income 2,383 1, Income after taxes on income (6,852) 3,116 1,202 4,621 1,028 Equity in losses of affiliate 1,634 1, Net income (loss) (8,486) 1, ,621 1,028 Net income attributable to non controlling interest ,632 2,248 1,366 Net income (loss) attributable to Pointer Telocation Ltd. Shareholders (8,527) 1,130 (2,107) 2,373 (338) Basic net earnings (loss) per share attributable to Pointer Telocation Ltd. shareholders (1.78) 0.24 (0.44) 0.51 (0.08) Diluted net earnings (loss) per share attributable to Pointer Telocation Ltd. shareholders (1.79) 0.22 (0.47) 0.50 (0.08) Basic weighted average number of shares outstanding (in thousands) 4,789 4,768 4,753 4,679 4,271 Diluted weighted average number of shares outstanding (in thousands) 4,789 4,834 4,753 4,679 4,310

14 Balance Sheet Data: Total assets 89, ,430 96, , ,236 Net assets (liabilities) of continuing operations 26,594 36,868 33,809 35,815 32,203 Working capital (deficit) (14,928) (15,093) (12,206) (7,867) (15,327) Shareholders equity 31,801 43,646 41,479 41,187 35,270 Pointer Telocation Ltd. shareholders 26,594 36,868 33,809 35,815 32,203 Non controlling interest 5,207 6,778 7,670 5,372 3,067 Share capital 3,353 3,280 3,266 3,266 3,139 Additional paid in capital 119, , , , ,910 9

15 Operating Results The following table presents, for the periods indicated, certain financial data expressed as a percentage of revenues for the line items discussed below: Year Ended December 31, Revenues Products Services Total Revenues Cost of Revenues: Products Services Amortization of intangible Total Cost of Revenues Gross profit Operating Expenses: Research and development costs, net Selling, general and administrative expenses Total operating Expenses Amortization of intangible assets and Impairment of long lived assets Operating income (loss) (3) 9 7 Financial expenses Other income (expenses) Income (loss) before tax on income (5) 6 3 Taxes on income Income (loss) after tax (8) 4 2 Equity in losses of affiliate Net income (loss) attributable to non controlling interest (10) 1 4 Net income (loss) attributable to Pointer Telocation Ltd. Shareholders) (10) 2 (3) 10

16 B. CAPITALIZATION AND INDEBTEDNESS Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. D. RISK FACTORS We conduct our operations through two main segments. Through our Cellocator segment, we design, develop and produce leading mobile resource management products, that include asset tracking, fleet management and security products for sale to third party operators providing mobile resource management services world wide, and to our Pointer segment. Through our Pointer segment, we act as an operator primarily in Israel, Argentina, Mexico and Brazil by bundling our products together with a range of services (which varies in each country), including stolen vehicle retrieval services and fleet management, roadside assistance, and car sharing services, in addition to emergency home repair services for sale to insurance companies, car fleets, and individual customers. This annual report and statements that we may make from time to time may contain forward looking information. There can be no assurance that actual results will not differ materially from our expectations, statements or projections. Factors that could cause actual results to differ from our expectations, statements or projections include the risks and uncertainties relating to our business described below. 11

17 Risk Factors relating to our Cellocator segment Manufacturing of products by our Cellocator segment is highly complex, and an interruption by suppliers, subcontractors or vendors could adversely affect our business, financial condition or results of operations. The products that we market, distribute and sell through our Cellocator segment are either manufactured or assembled at our own facility in Israel or, in certain cases, manufactured, surface mounted on printed circuit boards and assembled through supply agreements with third party subcontractors in Israel and abroad. Since 2010, we have been transitioning certain elements of our manufacturing and assembly process to third party subcontractors abroad. As a result, our control over the manufacturing process has been reduced to some degree and our dependence on third party manufacturers and producers has been increased. Consequently, as this transitioning continues, the number of factors over which we have only limited control will increase, which may have an adverse affect our future production and supply capabilities. Additionally, many of our products are the result of complex manufacturing processes, and are sometimes dependent on components with a limited source of supply. As a result, we can provide no assurances that supply sources will not be interrupted from time to time. Furthermore, our subcontractors or vendors may fail to obtain supply components and fail to deliver our products. As a result, a failure to deliver by our subcontractors or vendors can result in decreased revenues. Such interruption or delay of our suppliers to deliver components or interruption or delay of our vendors or subcontractors to deliver our products could affect our business, financial condition or results of operations. The growth of our business depends on the success of our current and new products. Our growth depends on the continued success of our existing products, as well as the successful design and introduction of new products. For example, as is the case with any product intended to prevent vehicle theft, over time, there may be an increased ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our stolen vehicle retrieval, or SVR, or anti theft products (although it is difficult to verify this fact). An increase in the ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of those products could adversely affect demand for our SVR and anti theft products, which would consequently affect our revenues. In addition, our ability to create new products and to sustain existing products is affected by whether we can successfully anticipate and respond to consumer preferences and business trends. The failure to develop and launch successful new products could hinder the growth of our business. Also, we may have to invest more resources in development than we originally intended. marketing can be longer than expected and there is no assurance of successful development or increased returns from a potential market, which may adversely affect our business. Undetected defects in our products may increase our costs and impair the market s acceptance of our products. The development, enhancement and implementation of the complex products of our Cellocator segment entail substantial risks of product defects or failures. Despite testing by us and our customers, errors may be found in existing or future products, resulting in delay or loss of revenues, warranty expense, loss of market share or failure to achieve market acceptance, severe damage to our reputation or any other adverse effect on our business, financial condition and results of operations. Moreover, the complexities involved in implementing our products entail additional risks of performance failures. Any such occurrence could have a material adverse effect upon our business, financial condition and results of operations. 12

18 We rely on operators to market and deliver the products of our Cellocator segment. Our revenues from consecutive end unit sales, future system upgrades, future infrastructure extensions and other sources, where applicable, are from countries in which third party operators, as well as the Pointer segment acting as an operator, conduct stolen vehicle recovery and fleet management services and are therefore dependent on their penetration rate and successful sale growth as well as the operators continuous success and their continuous decision to offer these products in their respective territories. Should we fail to maintain relationships with these third party operators, or these operators fail to successfully market and service our products, our business would be adversely affected. Our Cellocator segment relies on limited suppliers to manufacture devices for our stolen vehicle retrieval and fleet management systems (also referred to as Mobile Resource Management Solutions). While we have a diversified product base, offering some customers radio frequency devices and others cellular units together with GPS devices, we are still principally reliant on devices and components which we do not manufacture ourselves. Most of our components for the devices in our Cellocator products are manufactured for us by independent manufacturers abroad. Surface mounting on printed circuit boards is performed by two sub contractors. Assembly is performed by us and by subcontractors located in Israel and abroad. There is no certainty that these subcontractors will be able to continue to provide us with manufacturing and assembly services in the future. Our reliance on independent contractors, especially those located in foreign countries, involves a number of risks, including: reduced control over delivery schedules, quality assurance, manufacturing yields and cost reduced manufacturing flexibility due to last moment quantity changes; transportation delays; political and economic disruptions; the imposition of tariffs and export controls on such products; work stoppages; changes in government policies; the loss of molds and tooling in the event of a dispute with a manufacturer; and the loss of time, when attempting to switch from one assembly manufacturer to another, thereby disrupting deliveries to customers. 13

19 Our agreements and understandings with our suppliers are generally short term in nature and may be terminated with little or no notice. If a supplier of ours were to terminate its relationship with us, we may be compelled to seek additional sources to manufacture certain of the components of our systems or even to change the design of our products. Although we believe that most of the components of our systems may be readily acquired from numerous suppliers, we cannot assure you that we would be successful in entering into arrangements with other suitable independent manufacturers without significantly impairing our sales in the interim period. In addition, relying on third party suppliers requires us to maintain solid relationships to ensure that they continue to work with us. Since we do not own these third party suppliers, we have little or no control over their methods of operation. Should we fail to maintain relationships with these third party suppliers, our business would be adversely affected. We are subject to several risks as a result of obsolescence of product components. Although we believe that most of the components of our systems may be readily acquired from numerous suppliers, a number of the components are, or are likely to become in the near term, obsolete. We cannot ensure the accessibility of substitute parts for such components. Consequently, where components become obsolete we will need to choose between entirely replacing products which contain obsolete parts or modifying existing products in a manner which will facilitate the incorporation of non obsolete components. Both alternatives will require additional expenditure and reliance on third party manufacturers, and a failure to properly manage these additional costs and requirements could adversely affect our business. We are subject to several risks as a result of the international sales of our Cellocator segment. Systems based on our products are currently installed worldwide, with the majority of our products sold outside of Israel. We are subject to the risks inherent in international business activities, including changes in the political and economic environment, unexpected changes in regulatory requirements, foreign exchange controls, tariffs and other trade barriers and burdens of complying with a wide variety of foreign laws and regulations. In addition, if for any reason, exchange, price controls or other restrictions on conversion of foreign currencies were to be imposed, the operations of our Cellocator segment could be negatively impacted. In some of our international operations, we experienced the following difficulties: longer sales cycles, especially upon entry into a new geographic market; foreign exchange controls and licenses; trade restrictions; changes in tariffs; currency fluctuations; economic or political instability; international tax aspects; regulation requirements; and greater difficulty in safeguarding intellectual property. 14

20 We may not be able to successfully compete in the extremely competitive markets for our products. Our Cellocator segment sells mostly GPS/GPRS based vehicle devices and radio frequency based vehicle devices. In the GPS/GPRS field there is strong competition with many manufacturers introducing vehicle devices with competitive prices and various performance features. These devices are offered to operators that provide fleet management and stolen vehicle recovery services and the competition is with respect to different aspects such as price, performance parameters, etc. Should any of our competitors successfully provide a broader range of products with competitive pricing, our business results could be materially adversely affected. While we plan to continue improving our technology and products, and maintain our marketing efforts, we cannot guarantee that we will increase or maintain our customer base. We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively in the markets in which we operate. Our success and our ability to compete in sales of products by our Cellocator segment depend on our proprietary technology. We rely on a combination of proprietary technology, know how and trade secret laws, together with non disclosure agreements and licensing arrangements to establish and protect proprietary rights in our products. We cannot assure you that these efforts will successfully protect our technology due to the following factors: the laws of certain foreign countries may not protect our proprietary rights to the extent that they are protected by the laws of the United States; unauthorized third parties may attempt to copy or obtain and use the technology that we regard as proprietary; if a competitor were to infringe on our proprietary rights, enforcing our rights may be time consuming and costly, diverting management s attention and our resources; measures like entering into non disclosure agreements afford only limited protection; and our competitors may independently develop or patent technologies that are substantially equivalent or superior to our technology, duplicate our technologies or design around our intellectual property rights. In addition, others may assert infringement claims against us. The cost of responding to infringement claims could be significant, regardless of whether the claims are valid. We may see a decrease in demand for our products should OEM vehicle manufacturers begin embedding tracking and communication devices in their vehicles as part of their basic vehicle offerings. Our stolen vehicle retrieval and mobile resource management products are primarily installed before or immediately after the initial sale of private or commercial vehicles. Consequently, should vehicle manufacturers develop and embed tracking and communication devices in their vehicles, there may be a decrease in demand for our own products. 15

21 Risk Factors relating to our Pointer segment We may not be able to successfully compete in the extremely competitive markets for our services. We face intense competition in all the markets in which we offer our services. Should any of our competitors successfully provide a broader, more efficient or attractive combination of services to insurance companies, automobile owners, fleets, and car sharing users, in addition to such services as roadside assistance or emergency home repair, our business results could be materially adversely affected. For more information on our competitors, see Item 4B Competition. Due to the significant penetration of mobile resource management services, or MRM, such as stolen vehicle retrieval services, asset tracking services and fleet management services, as well as the moderate overall growth of these markets in the countries in which they are provided, we anticipate that revenues from MRM sales may increase in those countries. However, because of intense competition in those markets, we expect that our margins may decrease. We rely on third party operators to provide our services in certain countries In countries in which our subsidiaries conduct activities, we rely on subcontractors and police forces to provide our stolen vehicle retrieval services. This requires us to maintain solid relationships with these third party operators and governmental entities to ensure that they continue to work with us and provide a good service to our customers. Since we do not own these third party operators, we have little or no control over their effectiveness or methods of operation. Should we fail to maintain relationships with these third party operators, or should these operators fail to successfully market and service our products, including a failure to recover the stolen vehicles effectively and in a timely manner, it could negatively impact customers perception of the usefulness of our products and services and our business would be adversely affected. In offering our services, we use fixed price contracts with our customers. Our roadside services in Israel are offered at annually or monthly fixed price contracts, according to which we are generally paid a fixed price by insurance companies for each of their customers who subscribe to receive our services. Similarly, we are paid an annual fixed price by insurance companies for our emergency home repair services. Should operational expenses rise due to factors such as a rise in the price of gasoline, labor costs or any other materials necessary for our operations, our profit margins could suffer as a result. Since it is often difficult to predict future price rises in labor costs or other variable costs, our fixed price contracts may not adequately cover our future outlays. Additionally, the frequency by which subscribers may take advantage of our roadside services can vary unpredictably. Sustained adverse weather conditions, increased regional hostilities or acts of terrorism, poor road maintenance or increased theft ratio may increase customer usage of our services in any given year, thus reducing profit margins. 16

22 Most of the stolen vehicle retrieval services, fleet management services, and services provided by our Pointer segment are offered at monthly fixed price contracts, according to which we are paid a fixed price each month by our customers who subscribe to receive our services. Should operational expenses rise due to factors such as a rise in the price of labor costs or any other materials necessary for our operations, our profit margins could suffer as a result. Since it is often difficult to predict future price rises in the cost of components or labor costs, our fixed price contracts may not adequately cover our future outlays. Risk Factors Relating to Our Company Pointer Telocation Ltd. shareholders have a history of losses. With the exception of the years 2010, 2008, 2006 and 2003, Pointer Telocation Ltd. shareholders incurred a loss in each year of the Company's existence. The net loss attributable to Pointer Telocation Ltd. shareholders in 2011 was $8.5 million, consisting of a loss of $1.8 million resulting from continuing operations and $6.7 million in impairment of goodwill and intangible assets. Pointer Telocation Ltd. shareholders may continue to sustain net losses for the foreseeable future given the markets in which we operate. As a part of our strategy, we are focusing on the development of new businesses, products, technology and services in the territories in which we currently operate as well as in new territories. Investing in such new businesses may result in an increase in short term losses. If Pointer Telocation Ltd. shareholders may continue to sustain prolonged losses or losses from continuing operations, we may have to cease our operations. Conditions and changes in the global economic environment may adversely affect our business and financial results. The global economy in 2011 was adversely affected by stock market volatility, tightening of credit markets, concerns of inflation and deflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns and business insolvencies. These events and related uncertainty about future economic conditions, including conditions in Europe, our primary Cellocator market, following the debt crisis there in 2011, could negatively impact our customers and, among other things, postpone their decision making, decrease their spending and jeopardize or delay their ability or willingness to make payment obligations, any of which could adversely affect our business. Uncertainty about current global economic conditions could also cause volatility of our share price. We cannot predict the timing, strength or duration of this global economic downturn or subsequent recovery. In addition, while there has been a certain upturn in the worldwide automotive industry, this sector is cyclical in nature and difficult to predict. These factors, among other things, could limit our ability to maintain or increase our sales or recognize revenue from committed contracts and in turn adversely affect our business, operating results and financial condition. If the current uncertainty in the general economy, the European economy in particular, and the automotive industries sector does not change or improve, our business, financial condition and results of operations could be harmed. 17

23 Changes in practices of insurance companies in the markets in which we provide our SVR services and sell our SVR products could adversely affect our revenues and growth potential. We depend on the practices of insurance companies in the markets in which we provide our SVR services and sell our products. In Israel, insurance companies either mandate the use of SVR services and products for certain cars, or their equivalent, as a prerequisite for providing insurance coverage to owners of certain medium and high end vehicles, or provide insurance premium discounts to encourage vehicle owners to subscribe to services and purchase products such as ours. In Argentina, insurance companies purchase or lease our products directly and subsequently require their customers to subscribe to our SVR services. Therefore, we rely on insurance companies continued practice of: accepting vehicle location and recovery technology as a preferred security product; and with respect to insurance companies in Argentina, deciding to purchase or lease SVR services products from us directly. If any of these policies or practices change, revenues from sales of our SVR services and products could decline, which could adversely affect our revenues and growth potential. A decline in sales of consumer or commercial vehicles in the markets in which we operate could result in reduced demand for our products and services. Our stolen vehicle retrieval and mobile resource management products are primarily installed before or immediately after the initial sale of private or commercial vehicles. Consequently, a reduction in sales of new vehicles could reduce our applicable market for stolen vehicle retrieval and mobile resource management products, and, consequentially, reduce the market for stolen vehicle retrieval services and mobile resource management services which utilize our products. New vehicle sales may decline for various reasons, including an increase in new vehicle tariffs, taxes or gas prices, or an increased difficulty in obtaining credit or financing in the applicable local or global economy. A decline in sales of new vehicles in the markets in which our Cellocator segment and Pointer segment operate could result in reduced demand for our products and services. A reduction in vehicle theft rates may adversely impact demand for our SVR services and products. Demand for our SVR services and products depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of various factors such as the availability of improved security systems, implementation of improved or more effective law enforcement measures, or improved economic or political conditions in markets that have high theft rates. If vehicle theft rates in some or all of our existing markets decline, or if insurance companies or our other customers believe that vehicle theft rates have declined or are expected to decline, demand for our SVR services and products may decline. 18

24 The introduction of products using new technology and the emergence of new industry standards and practices could negatively impact our business. The wireless communications industry as a whole and specifically GPRS is characterized by rapid technological changes. The introduction of products using new technology and the emergence of new industry standards and practices could make our products less competitive and cause us to reduce the prices of our products. There are several wireless communications technologies, including HSPA, LTE, WiMax, personal communications services, specialized mobile radio and mobile satellite services which have been or may be implemented in the future for applications competitive with the applications we provide. Future implementation and technological improvements could lead to the production of systems and services which are competitive with, or superior to ours. We cannot give any assurance that we will timely or successfully introduce or develop new or enhanced products and services, which will effectively compete with new systems available in the market. Our business will be negatively impacted if we do not introduce or develop technologically competitive products and services that respond to customer needs and are priced competitively. We depend on a small number of customers. Following our acquisition of the activities of Shagrir Towing Services, the customers which account for a significant part of the revenues of Shagrir Systems Ltd., or Shagrir, are Israeli insurance companies which offer our roadside assistance and towing services as part of their vehicle insurance policy packages which they sell to their customers, as well as Argentine insurance companies which require their customers to obtain stolen vehicle retrieval services as part of their vehicle insurance policy packages. Although in 2011 none of our customers comprised over 10% of our total revenues, the loss of even a small number of customers could materially affect our financial condition. If the creditworthiness or the financial strength of the customers were to decline, there could be an adverse effect on our operating results and cash flows. Should geopolitical situations change in the countries where our customers operate, there could be additional credit risks. Our operations rely on the use of information technology and any material security failure of that technology could harm our business. Our operations, including the provision of mobile resource management services and our Cellocator segment, rely on the use of information technology and any material security failure of that technology or cyber attack could harm our business. We have implemented cyber security controls which involve the prevention, detection and recovery of data in the event of cyber security breaches. We perform regular effectiveness of control reviews of some of our systems as well as an annual external review of the degrees of effectiveness of the network security in our various departments. However, the internal controls we use over cyber security may not be sufficient to prevent significant deficiencies or material weaknesses in the future, and we may also identify other conditions that could result in significant deficiencies or material weaknesses. In the event of a cyber attack, we could experience the corruption or loss of data, misappropriation of assets or sensitive information, including customer information, or operational disruption. This could result in substantial loss of revenues, response costs and other financial loss, and may subject us to litigation and cause damage to our reputation, for which we may not be covered under our current insurance policies. 19

25 The use of our products is subject to international regulations. The use of our products is subject to regulatory approvals of government agencies in each of the countries in which our systems are operated by our Pointer segment or by other operators, including the State of Israel. Our operators typically must obtain authorization from each country in which our systems and products are installed. While in general, operators have not experienced problems in obtaining regulatory approvals to date, the regulatory schemes in each country are different and may change from time to time. We cannot guarantee that approvals which our operators and our Pointer segment have obtained will remain sufficient in the view of regulatory authorities. In addition, we cannot assure you that operators of our systems and products will obtain licenses and approvals on a timely basis in all jurisdictions in which we wish to sell our systems or that restrictions on the use of our systems will not be unduly burdensome. Our future operations depend on our ability to obtain additional financing. We have historically financed our operations through public and private placements of equity and debt securities, cash generated from the sales of our systems, grants for research and development projects, loans and bank credit lines. We believe that our current assets, together with anticipated cash generated from operations and outstanding bank credit lines, will sufficiently allow us to continue our operations as a going concern for the foreseeable future. However, we cannot assure that if we are required to raise additional financing in the future that we will be able to obtain such financing on satisfactory terms, if at all, and if we are able to raise financing through the issuance of shares, this may result in the dilution of the interests of our current shareholders. In a series of investments, since March 2003 to date, we raised $42 million from investors. We have registered for resale securities issued and issuable in connection with such investments in our securities (for further information regarding the private placement transactions see Item 10 Material Contracts). In May 2007 our registration statement on Form F 3 was declared effective, pursuant to an investment with a group of U.S. institutional investors consummated in April 2007, covering 1,207,500 of our ordinary shares (including 402,500 ordinary shares issuable upon the exercise of warrants issued in connection with that transaction). Additionally, on June 7, 2010 our registration statement on Form F 3 was declared effective pursuant to which, we may sell from time to time, any combination of securities, as described in the prospectus, in one or more offerings up to a total of $25,000,000 or the equivalent denominated in foreign currencies or foreign currency units. 20

26 As a result of the registration statements that we currently have outstanding and are currently filing, many or all of our investors who purchased our securities may elect to sell some or all of our securities. Should such sales be significant in volume or take place over a short period of time, our share price may decline significantly, and we may find it difficult to raise additional funding through the issuance of equity or convertible debt securities. If our future capital requirements are greater than the cash we obtain from our business and available financing, if any, we may, among other things, be required to significantly reduce our research, development, product commercialization, marketing or other activities or even cease operations. Over recent years, the securities markets in general have experienced increased volatility, which has particularly affected the securities and operations of many companies, including companies that have a significant presence in Israel. Although the volatility of these companies securities has often been unrelated to the operating performance of these companies, they may experience difficulties in raising additional financing required to effectively operate and grow their businesses. Such failure and the volatility of the securities markets in general may affect our ability to obtain additional financing at favorable terms. Pointer, Shagrir and Pointer do Brazil Commercial S.A have significant loans from Banks and others which they are required to repay in accordance with strict schedules that they may not be able to meet or that limit our operating and financial flexibility. During 2011, 2010 and 2009 Pointer do Brazil Commercial S.A, or Pointer Brazil, entered into loan agreements for an aggregate amount of $685,000 with several Brazilian banks in order to finance its operations. Should Pointer Brazil fail to repay the loans in accordance with the repayment schedule pertaining to the loans or if the Banks refuse to amend the relevant repayment schedule, the Banks may realize certain liens that were created in their favor, which in turn may have a material adverse affect on Pointer Brazil's financial condition. As of December 31, 2011 the amount outstanding under the loans is approximately $560,000. As of December 31, 2011, Shagrir has in the aggregate approximately $16.3 million in outstanding loans from Bank Hapoalim and Bank Leumi. Despite the fact that Shagrir is cash positive, should Shagrir fail to repay the loans in accordance with the repayment schedule pertaining to each loan or should the banks refuse to amend the relevant repayment schedule, the banks may realize certain liens that were created in its favor by Shagrir. This could result in Shagrir having to divest itself of parts of its business and may result in the cessation of its operations. As of December 31, 2011, Pointer has in the aggregate approximately $2.7 million in outstanding loans from Bank Hapoalim and unutilized credit facilities of $1.6 million. Should Pointer fail to repay the loans in accordance with the repayment schedule pertaining to each loan or if Bank Hapoalim refuses to amend the relevant repayment schedule, Bank Hapoalim may realize certain liens that were created in its favor, which in turn may have a material adverse affect on Pointer's financial condition. 21

27 In January 2008 Pointer entered into credit facilities for an aggregate amount of $1 million with Israel Discount Bank B.M., in order to finance its working capital. As of December 31, 2011, $ 0.3 million of these credit facilities were utilized. The credit facilities and loans described above contain a number of restrictive covenants that limit the operating and financial flexibility of Pointer and Shagrir. Please see Notes 11c and 11d to our consolidated financial statements for further information. The covenants are required to be met on an annual basis. Failure to comply with any of the covenants could lead to an event of default under the agreements governing some or all of the credit facilities and loans, permitting the applicable lender to accelerate all borrowings. As of December 31, 2011, Pointer and Shagrir were in compliance with the restrictive financial covenants. Our ability to continue to comply with these and other obligations depends in part on the future performance of our business. There can be no assurance that such obligations will not materially adversely affect our ability to finance our future operations or the manner in which we operate our business. In particular, any noncompliance with performancerelated covenants and other undertakings of our credit facilities could result in an acceleration of our outstanding debt under our credit facilities and restrict our ability to obtain additional funds, which could have a material adverse effect on our business, financial condition and results of operations. For further information on the loans described above, please see Item 5 Liquidity and Capital Resources and Item 10 Material Contracts. We may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired. Our balance sheet contains a significant amount of goodwill and other amortizable intangible assets in long term assets, totaling about $47.5 million at December 31, In 2011, we wrote down our goodwill by an amount of $6.2 million due to the impact of changes in economic conditions and forecasted results of our Cellocator segment. In addition, we amortized $0.5 million of the development technology intangible assets acquired from Cellocator Ltd. in September The circumstances leading to the impairment are attributed to the obsolescence of certain older Cellocator technology. In 2009 we amortized $3 million of customer related intangible assets attributable to our acquisition of Cellocator due to the decrease in activity of former customers of Cellocator as a result of the worldwide economic downturn. No impairment losses were identified in We test goodwill for impairment at least annually and potentially more frequently in the event that indicators for potential impairment exist. We review our finite lived intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a sustained decline in our share price, market capitalization or future cash flows, slower growth rates in our industry, termination of contracts assumed in connection with a merger or acquisition and obsolescence of acquired technology. In particular, the nature of the current worldwide economic instability and the potential impact of this on our business and our share price could require us to record a significant charge to earnings in our financial statements due to impairment of our goodwill or amortizable intangible assets. If that happens, then our results of operations will be negatively impacted for the period in which such determination was made. 22